Breaking Down Jamie Dimon’s Investing Letter

0:05Tyler Crowe:Jamie Dimon spoke and we kind of listened. This is Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe and today I'm joined by longtime Fool contributors Lou Whiteman and Jason Hall, who's pulling in for spot duty because you know what? It's that time of the season with spring breaks and family stuff that Matt Frankel needed a little bit of time off. So we brought in Jason off the bench for a little discussion here today. What we are going to get into is we have a big deal kind of in the wings with Bill Ackman looking to acquire Universal Music Group. And we're also going to dip into the mailbag. But before we get started, we are going to look at Jamie Dimon's most recent investing letter.

0:56Tyler Crowe:Before we do, the list of people who can write a letter and move markets is pretty small, perhaps even smaller today now that Warren Buffett is no longer writing the Berkshire letter. On that short list is Jamie Diamond, who recently penned the annual shareholder letter for JPMorgan Chase's annual report. Now, before we really dive into, you know, what it said or anything like that, I do want to like kind of couch it a little bit, maybe a little bit of disclosure. Jason, are you a shareholder of JP Morgan. I am not. Now, my family does through EZFs, but not directly. And what about you, Lou? Yeah, me neither.

1:33Tyler Crowe:We have three people who don't have direct investments in JP Morgan, but clearly have a lot of things to get into with this. And there was a lot in this letter. It is considerably longer than what you would say a Warren Buffett letter was. He threw some shade at emerging fintech companies while simultaneously acknowledging JP Morgan has the catching up to do in that area. He opined on bank regulations and how to fix them as the CEO of the largest bank in the U.S. that would benefit from less regulation. And there was quite a few words dedicated to the risk and the horizon with quite a bit of time on private credit.

2:09Tyler Crowe:And we'll get into all that. Now, we all read the letter. It was kind of our homework assignment before we were doing this. So for each of you, I want to ask two things and kind of a pull out from these letters. What made you say, heck yeah, and I'm really behind what he was saying? And where the other one, like, are you sure about that, Jamie? So I want to start with what you guys liked in the letter and any investing takeaways from it.

2:33Lou Whiteman:Lou, let's start with you. So first things first, Jamie really, really likes this role and he likes looking contrarian. So I think you have to filter it with that. If the sky is falling, he's going to talk about the sunshine. When things are sunny, he's going to talk about the clouds. That's just the way he does this. That said, Jamie is not a big fan of private credit, and I sort of found interesting or liked what he had to say, or I thought it was useful. Look, part of it with private credit is it is the competition. But also, he has some points. He writes, quote, it has always been true that not everyone providing credit is necessarily good at it.

3:12Lou Whiteman:I think that that simple advice should be kept in mind for anyone pursuing some of these stocks that are private credit companies. Blue Owl has been taking on the chin. We'll see about them. But at least something to keep in the back of the mind. Just because they're doing it doesn't mean they have all the answers either. Relatedly, he has a warning for all of us invested in private equity firms. The average hold time is now seven years. That's nearly double what it used to be. Exits have become a real issue. And this isn't a bull market. What Jamie's warning was is that if we do end up in a recession or an extended recession, it could get really ugly in PE land.

3:52Lou Whiteman:If they can't sell these things now, how are they going to do them if the bull market turns? And I think that that is worth, again, part of the due diligence as you consider these companies. It's worth keeping in mind. Lou, I don't think he was just talking about the folks in private credit not necessarily being good at lending. There are plenty of banks that have been proven to not be good at lending. And that actually ties a little bit into something that Diamond wrote. And it was about competition. He wrote, nonetheless, despite our best efforts, the walls that protect this company are not particularly high.

4:26This is an industry with relentless competition, at times onerous regulation. And Diamond has built something pretty incredible. I would think you could argue that because of regulation in some instances, the bank has succeeded. It's pretty great to be the FDIC's choice to take over failed institutions that actually have really great assets and customers. And I will push back a little bit, Lou, on the hat of being optimistic when times are bad and switching to the pessimist when times are good hat. Sure, I think he does love being viewed as that contrarian, but I also think that that's how he's wired.

5:09When you're running the biggest bank in the world, you not only have all of these assets, but you have massive liabilities because that's the capital that you've lent out. You have to be a little bit paranoid all of the time about the economy. And then when you combine that with his ruthless ambition, you get the right sort of combined mindset that's made J.P. Morgan such an incredibly dominant business over the past couple of decades.

5:32Tyler Crowe:I feel like what I'm saying is almost like a backhanded compliment because there was a lot of words in the particular letter that he gave related to like some of the new investing like themes or like lending practices that the company wants to have. You know, they started up this kind of defense focus sort of fund. And I believe that Ted Weschler is going to be part of the team running that. That was announced a little while ago. There was also like this invest in main street sort of thing. And I'll give Diamond a lot of credit. It was very much like a, you know, taking the pulse of America almost and being in the zeitgeist of what people are wanting to talk about, whether it be conflicts overseas, the war in Iran or the war between Ukraine and Russia, while at the same time talking about like affordability and entrepreneurship in the United States.

6:23Tyler Crowe:But it was also just like, yeah, but this is just lending. you are you're kind of being a bank and telling us that you're just going to lend to people which is it's kind of you know very interesting but a good way of really putting up the marketing for it tyler 95 of fintech is just packaging that is true and that could be said for bags as well so in that regard as i throw a little bit of shade at this already even though i was trying to give him a compliment as you looked at the letter because it was pretty extensive what was some of the things where you're like, are you really sure about that?

6:56Tyler Crowe:Because, you know, we always have some sort of a line where we're like, nah, I don't know if I believe that. Yeah. This, this segment kind of reminds me of the Saturday night live skit they did about Amazon Alexa giving answers and everybody's response was, I don't know about that. The thing that stood out to me was when JP Morgan, when a diamond wrote the JP Morgan chase, isn't a conglomerate in the world of banking. It's absolutely a conglomerate. It does basically everything. But where it's different than a lot of conglomerates is it actually does almost everything pretty well. It's also built huge franchises in some of the most profitable parts of banking, things like credit cards, for instance.

7:36And it's done it. Again, the timing has been incredibly fortunate, extremely low defaults because there's been really steady economic growth over most of that period. The tailwinds of low taxes, low interest rates. and I mentioned it before being Uncle Sam's favorite banker. At some point, I'm afraid that those tailwinds could change and the result could be some of JPMorgan Chase's strengths that have been built in that conglomerate. Yes, Jamie Dimon, I'm calling your bank a conglomerate. Some of the strengths might end up being weaknesses when the tides turn.

8:09Lou Whiteman:I'm going to get into the weeds here. Dimon was one of the leaders in killing what was called Basel III, which was this global framework that was thought up by regulators after 2008 to try to avoid repeating what happened in 2008. They won. They killed it. And he spiked the football in this letter. I get why he hated it. Fewer capital reserves means more money to lend, more money to make money on. And arguably, Jason, like you said, some banks are better than others. Arguably, this might be too onerous for J.P. Morgan if it's well run, but not everybody is as well run, as you say. The we promised we learned our lessons and we'll be good this time.

8:54Lou Whiteman:And so you don't have to punish us argument tends not to age well. So, Jamie, enjoy your moment now. We'll see. And I hope you're right.

9:02Tyler Crowe:These regulations aren't necessarily built for a J.P. Morgan because the way that it's constructed, it's probably one of the more fiscally conservative, financially solvent. As you said, Diamond always tends to be slightly contrarian when everyone's risk on. He's like, I don't know about that. So spiking the football, as you said, with Basel almost feels like a, yeah, it's good for you, but is it good for banking? Because I don't necessarily know if those rules were put up specifically for JP Morgan, even though it does affect them. It's more for like what we could call

9:35Lou Whiteman:the bad actors in the system. Spot on. You kind of want to regulate for the weakest link, not for the strongest link.

9:41Tyler Crowe:Coming up after the break, we're going to get into Bill Ackman's recent attempt to buy Universal Music Group. Introducing Fidelity Trader Plus, the next generation of advanced trading from Fidelity. Customize your tools and charts and access them seamlessly across desktop web and mobile. For faster trades anywhere you go, Try the all-new Fidelity Trader Plus. Learn more about our most powerful trading platform yet at fidelity.com slash trader plus. Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC. Member NYSE SIPC. Speaking of investors who are often on the front page, Bill Ackman certainly fits that description.

10:24Tyler Crowe:Pershing Square is his investment vehicle, the hedge fund. He's been trying to basically buy Universal Music Group numerous times over. But this specific time, it was a deal announced today with a new deal that would basically value Universal Music Group at about$60 billion. Now, this isn't the first time that Ackman tried to do it. There was a SPAC, I believe, back in 2021 that he was using to try to acquire a portion of Universal Music Group that would have made them like a controlling stakeholder. And much like that previous one, this new deal is also a bit on the convoluted side. Now, knowing the three of us, there's probably a temptation to do like a Statler and Waldorf impersonation from the Muppets and just kind of heckle him from the background.

11:08Tyler Crowe:But to avoid that fate, I want to get started here. Like, what does Ackman specifically see in Universal Music Group that it's been like his white whale for the past several years? Yeah, this is a cash cow business. And to a large degree, it owns irreplaceable assets between artists that it has signed and music rights that it just outright owns. It's the world's largest label. It's the sort of business that shouldn't really require a ton of operating expenses, but whose assets should just generate steady royalties from streamers and radio stations. And he's always been interested in those kind of cash cow businesses.

11:43Tyler Crowe:Like I said, the deal is kind of convoluted, in part not just because, you know, Bill Ackman's penchant for using convoluted structures to make acquisitions, but also the ownership structure of Universal Music Group is a little convoluted in its own way because it has a whole bunch of, I wouldn't call them majority owners, but owners with enough of a stake that if they say no, the deal wouldn't go through. And, you know, because of that, it makes it a little bit harder to convince them to get rid of it, to sell their stake. So this isn't the first time he's tried to do deals and done it in some convoluted way.

12:16Tyler Crowe:And frankly, we've all kind of had questions about the viability of doing it or evaluation or whatever. Now, I don't want to speak to either of you, but Ackman's track record isn't necessarily spotless. Don't you agree?

12:29Lou Whiteman:Yeah. And what exactly are we trying to accomplish here, Bill? And kind of what's the big picture? It feels like he's just throwing his spaghetti at the wall to see what sticks. That's the strategy right now. He wants to do the universal deal under his Pershing Square holding company. He's also been trying to take Pershing Square and various entities public in various forms for the last few years with little success, but he's trying that again now. He's not doing this under Howard Hughes Holdings, a separate public company that he also controls and which he claims he's going to turn into the new Berkshire Hathaway.

13:05Lou Whiteman:The new Berkshire Hathaway could really use that cash cow Jason mentioned to make it happen. So, you know, I mean, Bill, choose a child here. I'm not going to slam the plan. I think it makes sense to try and go after these assets, but I would at least appreciate if he picked a vehicle and went with it. If you're a Howard Hughes shareholder, you're saying, what about us? You're buying some insurance thing and hoping for the best. Multitasking never works well for almost all of us. And it's probably going to work out well for Ackman if any one of these succeed. But as investors, I really like the one I'm involved with to succeed or for them all to succeed.

13:45And I think it's important to remember, too, that even the best investors screw up at times. And I think something that happened about 12 or 13 years ago with Ackman that stands out to me was when he shorted Herbalife. I don't know if you remember that. That was one of the first times we saw an investor really do a big public presentation. He streamed it. It was two or three hours long. This was 2012 when that wasn't normal. It was this long presentation basically saying that Herbalife was a pyramid scheme. Well, his short blew up in his face, lost a billion dollars. And it gets even more like juicy irony here.

14:24A couple of years later, invested like$3 billion in Valiant Pharmaceuticals and lost like 90 % of that because you guessed it, management was doing fraud.

14:37Tyler Crowe:I feel like buried deep somewhere in YouTube, there's the video of Bill Ackman was actually presenting the Herbalife short. I think it was on CNBC. and Carl Icahn called in as like a guest and they started going back and forth about it because that's right I forgot about that it's like a major shareholder and at the time it was probably the most like eventful thing that happened in CNBC in like five years so I want to broaden out the lens a little bit here because we're talking about famous investors following what they do you know making opinions on it. And, you know, I think a lot of investors use famous individuals, notable individuals.

15:16Tyler Crowe:I mean, there's been an entire like cottage industry of following Warren Buffett style investing, or even mirroring the moves that he does. And for a decent enough proportion of people, I'm sure that they look at Bill Ackman in the same way. So I want to brought out the idea of, you know, using individuals and trying to mirror their moves as, as an investing strategy, how do you as an investor kind of incorporate famous investors' stock picking decisions into your actual own investing process?

15:45Lou Whiteman:You got to play your own game. You can almost find someone who is, you always find someone who's bullish, someone who's bearish on almost anything you're looking at. You can find the confirmation bias if you want it, but it, you know, and it, look, it probably makes sense to read all of this. They are smart people with opinions, but acting because someone who is famous acted, assuming that assumes you have the same portfolio as them, the same goals as them, the same timeline as them. And let's face it, you don't. So to do what they do doesn't make sense. There's also just a, such a big information difference, asymmetry that I think is really important with this kind of thing, because the Ackmans of the world are pretty rare in the investing community where they're talking about their deals in this near, near kind of real time thing that they're doing.

16:33The realities we generally, like if we're relying on 13F filings, I mean, it can be weeks to months before it becomes public. So you're acting so far after the fact, it's possible that the other party that you're following is already maybe moved on when you're buying, right? Because of the nature of, of that asymmetry of information and when they're acting. So for those reasons and everything that Lou said, I generally don't really pay much attention to what the big names are doing. If there's one thing that's important to remember is that, you know, we've spent some time beating up Ackman, but one of the features of stock investing, and it feels like a bug sometimes, but it's a feature is it's less about precision and more about asymmetric returns.

17:20it's the massive winners that cover up for those bad investments plus a lot more. And if we're just chasing somebody else's portfolio, we will sell out of our winners too quickly often. And it hinders our ability to reach our financial goals in the longterm.

17:36Tyler Crowe:If I were to give my interpretation of it, just blindly following whatever they do is never a good idea. But there are at times, even the most, the Ackmans of the world, the Cathie Woods of the world, the Warren Buffett's, there are always ideas. And there is a reason that they probably got into the stocks that they got into for one reason or another. And it can be a decent way to kind of, you know, do some ideation and at least give you something to like, you know, Hey, maybe this is a string I should follow. You know, we've thrown a lot of shade at Ackman in this particular one, but his investment in Uber has been one, probably one of his better performing stocks in his portfolio.

18:13Tyler Crowe:And is a great example of kind of taking a try an opinion at a time when Uber didn't look great. So there's always examples of like that. And so using famous investors as a way to source ideas is probably the most valuable thing investors can do at any given time. Coming up after the break, we're going to dip into the mailbag. Hey, Fidelity.

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18:37Tyler Crowe:Start with as little as$1 with no account fees or trade commissions on U.S. stocks and ETFs. Hmm, that's music to my ears. I can only talk.

18:49Lou Whiteman:Investing involves risk, including risk of loss. Zero account fees apply to retail brokerage accounts only. Sell order assessment fee not included. A limited number of ETFs are subject to a transaction-based service fee of$100. See full list at Fidelity.com slash commissions. Fidelity Brokerage Services, LLC, member NYSE, SIPC.

19:02Tyler Crowe:Quick reminder before we answer our question from one of our listeners here. If you have a question for the mailbag, you can, if you want to ask for Lou, Jason, Matt, John, anybody else that's on the podcast at any given time, you can contact us at podcasts at fool.com. We'd love to answer your questions on air. And just the only request that we make is if you do ask a question, keep it foolish. That email again is podcasts at fool.com, podcasts at fool.com. And so for this listener question, it came in from Marty Meyer. And here was the question that he had. I love dividends and I like ETFs. And I think that could be said for most of us on this call and probably listening too.

19:41Tyler Crowe:There is a relatively new ETF and it's from JP Morgan. It's called JEPQ, which is a covered call strategy on the NASDAQ to generate monthly income for investors. Now, just to broaden out, JP Morgan's covered call strategy is not the only one available on the market. There are lots of other ETFs that are looking to make similar strategies. So we don't want to put, you know, endorse JEPQ over any one or the other, but there is this kind of group of ETFs that are doing something in a very similar way. So to kind of answer Marty's question, guys, looking at this type of investing vehicle, what are your thoughts?

20:22Tyler Crowe:Cause they're, they are pretty high yield, but they do tend to have things like higher expenses and stuff like that. Yeah.